Stage 3. The Hangover

New week. New year. Happy New Year?
That depends on whether a hangover is waiting for you or not. Because this is not a pleasant phase. But it is, more or less, inevitable if you’ve managed to become addicted to venture capital.

This week I’m skipping the fun segment “Capitaholic of the Week”—there have barely been any rounds closed over the past week anyway. We’ll pick that up again next week.

What could be more appropriate right after New Year’s than writing about the hangover?

The venture capital model creates a situation that almost guarantees that, sooner or later, you as a founder will end up in a hangover phase. The hangover itself is not a crash. It creeps up on you. Depending on how you act as a founder, a crash may eventually follow. But for now, it’s “just” headwind - on an industrial scale.

What’s most interesting is that this is actually your golden opportunity as a founder: a chance to change course and break your capital dependency.
It’s an opportunity in disguise.

Most founders miss it.

The hangover appears when reality catches up with the promised land of milk and honey. When the metrics don’t live up to what was announced and sold. Or when the metrics—often poorly chosen to begin with—start to decline. Preferably at the same time as macro headwinds amplify the pain. Quite often, this isn’t mere correlation. It’s causality.

A company built on solid fundamentals, with profitability and resilience at its core, will handle these headwinds far better. As a Capitaholic, things start to heat up quickly. It may already be too late depending on how many things go wrong at once, but regardless—it’s time to act. Or rather, to react. Because you didn’t act earlier by doing what you should have done before you had a reason to do it. Now, at least, you have a reason.

Chances are you still won’t do it.
And even if you do, it will probably still go to hell.

It was fun—until now. Now reality catches up. You actually have to build a company that works. The money doping doesn’t last forever.

Let’s define success for a company purely in terms of survival. It consists of two things:

Most companies fail at the first step.

To deliver value profitably, the business must operate efficiently enough to create that value at a cost lower than what the customer pays. If you sell to consumers, you even get a bonus—an efficiency arbitrage in the form of VAT.

VC firms love scalable business models, but they often feed inefficient teams that pretend to be efficient through promises of future efficiency. This allows them to mask today’s inefficiencies by raising more venture capital and pushing the problems into the future.

It’s not cool. It’s not fun. And it’s not easy to build an operationally efficient company. Venture capital helps you avoid that—until the hangover hits and operational efficiency becomes your last lifeline.

You must get operations right. But if you haven’t even solved the first two steps—value creation and pricing (i.e. the business model), which together constitute product–market fit—then it doesn’t really matter anyway.

What you should do is seize the moment and get the business in order.

Cut costs. All of them.

If you haven’t found product–market fit, you need to scale back to a level where you can effectively start over and focus all your time and energy on finding it. If you have found it but still need to reach profitability, the turnaround doesn’t need to be quite as brutal—but significant cost cuts and tough decisions are still almost always necessary to truly fix operations.

Distribution. Scalability. Onboarding.
Everything has to work—and it has to work profitably—while you’re fighting headwinds.

They force themselves into bridge rounds and down rounds.

“Let’s just raise some money and survive until the wind turns.”
After all, we’re optimists.

Yes, we get heavily diluted—but at least we get to continue.

Stakeholders start grumbling. Performance suffers, which means even more time is spent managing boards, investors, and other uninterested parties. This can go on for quite a while. But it’s exhausting. It wears you down and drains your team. And everything that actually needs to be done remains undone—because it keeps getting postponed.

We were 25 people and needed to shrink. And we did—every time we got a new reason to do so. In other words, I didn’t get ahead of the hangover; I waited for it. It hit us again and again over two years.

Eventually we were only five people left. In some ways, that forced focus—and higher productivity. We were very close to pulling off the three-step rocket:

If we hadn’t taken on loans that became disproportionately large as we shrank, we could have been profitable. But eventually it still blew up, as I’ve described before.

And that explosion—the crash—is the next step in the Capitaholic journey. Precisely because most founders choose the reactive and cautious path.

The hangover doesn’t come because you did something wrong.
It comes because the party was badly designed.

Venture capital is addictive—and that addiction guarantees a hangover sooner or later. The chase for fast money and rapid growth is the real culprit.

Compound interest applies to your company too.

Let it grow profitably at 15% per year and you’ll double in five years. Calm. Methodical. Not sexy according to industry media—but most companies chasing 150% annual growth won’t exist in five years.

You will.

Another five years and you’re 4× bigger. If this isn’t a company you plan to exit, you might run it for 20+ years. After 20 years, that’s 16× growth.

VC doesn’t have that patience.
But in a company built from your own drive and passion, you won’t need patience—because you’re doing what you actually want to do.

After 20 years of 15% growth, with financial stability and resilience through downturns, your company is 16× what it is today.

Read Charlie Munger. Get inspired by Warren Buffett.
Then translate it from investing into company-building.

It’s an investment in yourself, your money—and your everyday life.

/Jacob Kihlbaum

Capitaholic Anonymous

Till next time,